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Conditions You Need To Meet When Applying For a Business Loan

Most people borrow money for various reasons, including buying a new car or a house. Likewise, loans are useful for large purchases, paying for studies, financing business startups, trips, celebrations, and costly car repairs.

For a business, a credit facility can also come in handy during expansion and when seeking working capital. Most lenders will require you to meet specific conditions when taking out a business loan.

This discussion explores conditions you need to meet when applying for a loan for business. Read on.

Registration

When applying for a business loan, your business must be legally registered to operate in the US. Your lender will require certain documents to prove that your business is registered. These include:

  • Business licenses and operating permits
  • Copy of your lease agreement
  • Ownership documents and affiliations
  • Insurance plans
  • Business plan
  • Certificate of incorporation
  • Partnership deed
  • Articles and memorandum of associations
  • Employee Identification Number

Registration alone doesn’t guarantee that your loan application will be successful. You must meet other criteria to be considered for a cash loan.

Be a Resident

To qualify for a business loan, you must be a US citizen.

But, a question arises. Can you get a loan as a non-resident in the US? The short answer to this question is yes! However, it can be challenging for a lender to approve your application.

There are stringent legal processes that require specific documentation or paperwork for foreigners seeking loan facilities.

Traditionally, most lenders fear lending to non-residents because of the belief that they may leave the country during the loan tenure.

When applying for a loan as a non-resident, you must have a social security number, a sponsored visa by your employer, and a work permit. Still, there’s no guarantee that your loan request will be granted.

Identity Proof

Lending institutions ask for proof of identity before approving a loan.

The main reason is to prevent someone from borrowing money with another person’s identity, popularly known as identity theft.

Some of the most acceptable types of identification include;

  • Social Security Card
  • Birth certificate
  • Passport
  • State-issued ID
  • Certificate of citizenship or Green Card
  • Military ID
  • Driver’s license

Proof of Income

For you to qualify for a business loan, you must demonstrate proof of income, which is a prerequisite because the lender would want to know whether you have the ability to pay the loan.

Whether employed or running a business, the lenders normally demand evidence to support a loan application.

For a business loan, you’ll be asked for a bank statement with regular income, business records, or books of accounts, invoices, sales receipts, registration certificate, and IRS number.

Proof of Address

When applying for a business cash loan, your lender will want to know your personal and business current location. In this case, they’ll ask for a copy of your utility bill, lease or rental agreement, auto insurance policy, or mortgage documents that list your current address.

Debt-to-Income Ratio

The debt-to-income ratio or DTI is the monthly amount your business commits to debt or loan repayment. Generally, lenders will require a lower DTI of not more than 36% when approving loan applications.

Your Personal and Business Credit Score

Before approving your loan application, lenders pull your credit report to see your payment history and debt status.

Credit reports are generated by credit reporting agencies such as Equifax, Experian, and Transunion.

Your credit report contains a credit score, a digit between 300 and 850, that depicts your creditworthiness.

Subsequently, lenders use this value to assess whether you have the ability to repay the loan. Most lenders require your score to be at least 600 to qualify.

Here’s an example of Experian’s classification of credit scores.

CategoryFICO Score
Very Poor300-579
Fair580-669
Good670-739
Very Good740-799
Excellent800-850

Businesses, too, have credit scores to determine whether they’re solvent and can pay debt obligations. The most common is the Dun & Bradstreet-D&B PAYDEX scoring model, which ranges from 0-100. A good credit score hovers around 80-100, while a bad score is below 49.

Despite this, some lenders may still offer cash loans even with bad credit, but they may require you to meet the following requirements.

  • Have security to back up your application.
  • Provide a guarantor with a good credit score.
  • Accept a high-interest loan with a short tenure.

Collateral

As a general rule, lenders may have internal guidelines regarding the type of collateral needed for loan approval. Typically a cash loan is a quick disbursement facility based on your income capacity.

The lender may not ask for any collateral when granting this loan facility. But, usually, they rely on proof of income and credit score.

However, if your personal or business credit score is poor, they may ask for a second borrower as a guarantor to the loan. In this case, your guarantor can be a friend or spouse. In the event of default, the co-signer takes responsibility, which may impact their credit rating.

If you’re purchasing a property, your lender may retain the title and discharge it after you’ve made the full payment.

What To Do If Your Loan Application Is Rejected

First of all, it’s essential to keep in mind that every lender sets different requirements for loan applications. Whereas some are obvious at a glance, others are hidden.

Whether your business loan application will be granted or declined depends on the lender. 

Your lender may reject your loan application if you don’t meet certain requirements. They will let you know in writing or over the phone.

If your loan request is rejected, you can allow some time to lapse before the next application as you work on the issues that led to the decline.

Further, if the refusal was due to bad credit, you can improve your score by:

  • Paying your personal and business bills on time. You can set reminders on your phone or calendar not to miss a payment.
  • Closing open accounts that may be attracting charges. It mostly applies to current accounts.
  • Adhering to the credit utilization rule of 30%. Don’t exceed 30% of your credit limit.
  • Keep one credit card to avoid impulse buying and accumulating debt.

Conclusion

All the above requirements are vital in the context of lending. Stable income, a good credit score, and proof of income guarantee the ability to pay the loan. Before approaching your lender for a business loan, prepare your income statement and credit report as precisely as possible.

In addition to income, have your documentation ready. If you already have ongoing debt obligations, know that these will impact your new credit application. Lastly, shop around for several business cash loan options to get a favorable interest rate.

What do you think?

Written by Startup Packs Staff

Account for publishing GPs at Startup Packs

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